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POLICY FRAMEWORK ON FDI

AND FPI AND THEIR IMPACT ON


INDIAN ECONOMY
Introduction
International Investment
International investment occurs when a company or
individual from one nation invest in assets or ownership
stake of a company based in another nation.
International or foreign investment is the process by
which the resident of one country acquire the ownership of
the assets for the purpose of controlling the production,
distribution and other productive activities of an enterprise
in another country.
International investment can be direct and indirect
investments.
Significance of International
Investment
Links host economy with global markets.
A major source of capital.
Strong relationship between foreign investment
and economic development.
Improving international trade.
Generate employment.
Encourage upgradation of technology.
Links integrated global production system.
Burden of risk of investor is shifted.
Classification of International
Investment

Foreign Direct Investment (FDI)


Foreign Portfolio Investment (FPI)
Foreign Direct Investment (FDI)
FDI is a form of cross-border investment. FDI refers to
the investment process whereby resident of one
country acquire ownership of physical/financial
assets for the purpose of controlling the production,
distribution, and other activities of an entity/firm in
another country.
an investment involving participation in
the management of a domestic firm in one country
by an enterprise or investor resident in another
country.
Types of Foreign Direct Investment

On the basis of the nature of business activities.


1. Horizontal FDI
2. Vertical FDI
3. Conglomerate FDI

On the basis of assets creation/acquisition strategy.


1. Greenfield Investment

2. Brownfield Investment
FDI Policies of India
100% FDI allowed in medical devices.
FDI increased in insurance & sub-activities from 26%
to 49%.
100% FDI allowed in the telecom sector.
FDI in commodity exchanges, stock exchanges &
depositories etc. under the govt. route has now be
brought under the automatic route.
Removal of restrictions in tea plantation sector.
Continue..

FDI limit raised to 74% in credit information & 100%


in asset reconstruction companies.
FDI limits of 26% in defence sector raised to 49%
under government approval route.
Construction, operation and maintenance of
specified activities of railway sector opened to 100%
foreign direct investment under automatic route.
Impact of FDI on Indian Economy
FDI Inflows in India (For the era of Pre Liberalization and Post
Liberalization Period)
India has always been considered an attractive segment by global
investors, but its unbending FDI policies were a significant
hindrance in this regard. For this a series of economic reforms has
been made to stimulate the foreign investment, so that India has
placed itself in the race of quickly emergent regions Asia Pacific
region. Foreign investments are welcomed by the government
which would cause the industrial development in terms of bringing
advantages of technology transfer, making expertise, introduction
of managerial techniques and new possibilities for promotion of
exports. These changes have been made due to change in the
government policies and removing the ceilings on foreign equity
imposed by FERA. FDI is becoming popular because it is not creating
debt on Indian economy but it is a source of external private
finance.
Sectors Attracting Highest FDI Equity
Inflows
The incursion of FDI in service sectors, construction,
aviation sector and development sector, etc from April,
2000 to March, 2015 earned substantial sustained
economic growth in the economy of India. After
liberalization foreign direct investment is a key area which
is considered a developing indicator in Indian economy.
Today India is developing economy and attracts many retail
investments and got fifth rank (Kearneys Annual Global
Retail Development Index (GRDI) for the year 2012). In
2013 from January to November there are various mergers
and acquisitions deals are of worth US $ 26.76. If sectorial
analysis its shows that FDI inflows are in service sectors
which include Financial, Banking, insurance Sectors, NBFC
etc. which is high as compare to other sectors.
Inflows of FDI in various cities of India
(2000-2015)
The total inflow of FDI in India is Rs. 12,55,624
crore (252116 us million$) among there.
Mumbai is the first preferred destination
which is attracting FDI inflow in terms of
capital investment. New Delhi is the second
preferred and Chennai is the third preferred
cities which are attracting FDI in India.
Foreign Portfolio Investment (FPI)

In Foreign Portfolio Investment, the investor is


interested only in returns. Investing in equities, bond
or other securities of entities abroad are portfolio
investment. It is investment in financial assets
denominated in foreign countries currency. The
investor has no control over the use of capital he has
invested. He does not participate in the management
of the enterprise.
Classification of Foreign Portfolio
Investment

1. Foreign Institutional Investment (FII)


2. Investment through GDRs and FCCBs
Foreign Institutional Investment (FII)
Foreign institutional investment are made by Foreign
Institutional Investors. Foreign Institutional Investor
means an entity established or incorporated outside
India which propose to make investment in India and
which is registered as a FII with the Securities and
Exchange Board of India (SEBI). FII including institutions
such as Pension Funds, Mutual Funds, Investment
Trusts, Assets Management Companies, Nominee
Companies and Institutional Portfolio Managers or
their power of attorney holders can invest in all the
shares, debentures, and warrants issued by listed
companies on the primary and secondary markets.
Investment through GDRs and FCCBs
Depository Receipts (GR) and Foreign Currency
Convertible Bonds (FCCB) are instruments issued by
Indian companies in the foreign market for mobilizing
capital from a foreign country.
FCCB means a bond issued by Indian company
expressed in foreign currency, the principal and interest
of which is payable in foreign currency.
DR means a negotiable security issued outside
India by a depository bank, on behalf of an Indian
company, which represent the local Rupee
denominated equity shares of the company held as
deposit by a Custodian bank in India.
How FPI emerged in India?
In 1992, India opened up its economy and allowed
foreign portfolio investment in its domestic stock
market.
Since then, FPI has emerged as a major source of
private capital inflow in this country.
India is more dependent upon FPI than FDI as a
source of foreign investment.
During 1992-2005 more than 50% of foreign
investment in India came from FPI.
FPI policy in India
The government has brought as well designed FPI policy.
Most important type of investment by FPI is in shares or
equities.
According to the present FPI policy investment upto 10%
share holding by a single foreign investor in an Indian firm is
FDI
All FPI cannot acquire more than 24% of the paid-up capital of
an Indian company.
SEBI setting the investment limit of FPI.
Impact of FPI policy in India
The heavy inflow of FPI can provide Indian economy
a non-debt creating source of foreign investment.
FPI reduce the pressure of foreign exchange gap.
The flow of resources into the capital, scarce
countries like India reduces their cost of capital,
increase investment and raises output
It act as a catalyst for overall development of stock
market performance in India.
The lower cost of capital and a booming share
market can encourage new equity issued in India.
THANK YOU

CHINCHU ULAHANNAN